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The smog blanketing northern China, along with uncertainty over Japan's nuclear future, make a compelling case for getting behind producers of the cleaner-burning fuel. But cast your eyes south to Australia, where a $160 billion gas-export-facility investment boom is under way, and it's the bears who are in charge. The S&P/ASX 200 Energy Index has fallen 27% since peaking in April 2011, sharply lagging behind Australia's main stock index, which is flat over the same period.

"IT DEPENDS ON YOUR RISK tolerance, but there's no doubt that, longer term, these projects are worth a lot of money to the companies and obviously will generate a lot for shareholders as well," Xiradis contends.

Santos and Origin are the biggest shareholders in separate plants in eastern Australia's Queensland state, respectively costing $18.5 billion and 24.7 billion Australian dollars ($25.3 billion) and due to come online in 2015. Woodside's $15 billion Pluto terminal in western Australia shipped its first cargo of LNG last May, and management must decide by midyear whether to lead development of an even bigger terminal nearby.

Driving this investment is rapid growth in Asian-energy demand. China's gas consumption alone has been forecast to hit 545 billion cubic meters by 2035, quadruple its 2011 level. India is also shopping for gas, while Japan must find new LNG sources to replace supply deals that are expiring soon.

At the same time, Australia's political stability and close proximity to Asia give it an edge with buyers over some other global suppliers, especially those in the Middle East.

North America has the potential to become a rival in global gas markets, but its exports won't start until 2015 at the earliest and then at a very low level. Almost all Australian projects under construction will be operating by 2017.

Australian energy companies might look overvalued relative to their global peers, but this is misleading. True, Woodside trades at 15.3 times the current fiscal year's expected earnings, well above the 11.2 of
ExxonMobilXOM -4.577761715455969%Exxon Mobil Corp.U.S.: NYSEUSD79.21
-3.8-4.577761715455969%
/Date(1438376464800-0500)/
Volume (Delayed 15m)
:
25527621AFTER HOURSUSD79.303
0.0930.11740941800277743%
Volume (Delayed 15m)
:
705040
P/E Ratio
11.8875031891105Market Cap
331185553735.558
Dividend Yield
3.686403231915162% Rev. per Employee
4063760More quote details and news »XOMinYour ValueYour ChangeShort position
(XOM) and the 9.5 of
ChevronCVX -4.890895410082769%Chevron Corp.U.S.: NYSEUSD88.48
-4.55-4.890895410082769%
/Date(1438376428292-0500)/
Volume (Delayed 15m)
:
18833469AFTER HOURSUSD88.51
0.030.033905967450271246%
Volume (Delayed 15m)
:
229912
P/E Ratio
13.675425038639876Market Cap
166384702172.015
Dividend Yield
4.837251356238698% Rev. per Employee
2421550More quote details and news »CVXinYour ValueYour ChangeShort position
(CVX), both of which also are boldly betting on Australian LNG. However, those comparisons gloss over the large jump in Australian company earnings when their heavy capital investment in LNG projects starts to bear fruit. In addition, about 90% of the gas is already contracted to Asian customers at prices linked to oil futures. So the plants should be profitable, even if costs continue to rise.

Confidence in the sector was dented in December when Chevron said that the cost of its Gorgon LNG venture with Exxon and
Shell
(RDS-A) in western Australia had ballooned by 40% in U.S. dollar terms, to $52 billion, because of labor shortages, currency swings, and delays due to bad weather. However, analysts say that the current share prices barely value Australian companies' LNG projects—if at all.

Benjamin Wilson, an oil and gas analyst at JPMorgan in Sydney, notes that investors in Santos have free exposure to the GLNG project in Gladstone, Queensland, based on Santos' current share price of A$11.90. That project is at risk of cost overruns, particularly owing to currency swings, but Wilson argues that this shouldn't deter investors. "Given that GLNG's total capital expenditure would need to double from this point to destroy its net present value, we think the exposure is a sound bet," says Wilson, who rates Santos at Overweight with a price target of A$17.17—44% above its current level.

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